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Hire a hero, enjoy the benefits

New incentives for hiring disabled and unemployed military veterans

Most provisions of the work opportunity tax credit (WOTC) expired
on Jan. 1, 2012, but the program was modified and partially extended
by the VOW to Hire Heroes Act of 2011, P.L. 112-56, to cover military
veteran hires. Under Sec. 51, as amended, employers may be eligible
for a credit of up to $9,600 for each qualified veteran they hire
after the law’s enactment date, Nov. 21, 2011, and before Dec. 31, 2012.

The act created the returning heroes and wounded warriors tax
credits. It expanded previous law defining a “qualified veteran” for
the WOTC credit (Sec. 51(d)(3)). Under previous law, which continues
to apply, a qualified veteran is one who a designated local agency
(DLA) certifies as being:

1. A member of a family receiving assistance under a supplemental
nutritional assistance program (principally, food stamps) for at least
three months, all or part of which is during the 12-month period
ending on the hiring date; or

2. Entitled to compensation for a service-connected disability and
was either:

Discharged or released from active duty in the U.S. armed
forces not more than one year before the hiring date; or

Unemployed for a period or periods totaling at least six months
during the one-year period ending on the hiring date.

The new law adds the two new returning hero tax credit
categories. Under the new law, a qualified veteran also includes one
who a DLA certifies as:

Having aggregate periods of unemployment during the one-year
period ending on the hiring date that equal or exceed four weeks
(but less than six months); or, for a higher maximum credit amount,

Having aggregate periods of unemployment during the one-year
period ending on the hiring date that equal or exceed six months.

An individual is a veteran if he or she either (1) served on
active duty (other than training) for a period of more than 180 days
or (2) was discharged or released from active duty for a
service-connected disability. In either case, the veteran must not
have been on extended active duty on any day during the 60-day period
ending on the hiring date. Extended active duty is a period of active
duty (not including training) of at least 90 days.

To avoid doubling up on the new WOTC credit, a successor
employer—one that acquires substantially all of the property used in a
trade or business of another employer—must for purposes of calculating
the credit reduce the wages paid or incurred by the successor by those
wages paid or incurred by the previous employer.

An individual will be treated as a qualified veteran only if (1) on
or before the day the individual begins work, the employer obtains
certification from the DLA that the individual is a qualified veteran;
or (2) the employer completes a prescreening notice (Form 8850,
Pre-Screening Notice and Certification Request for the Work
Opportunity Credit) on or before the day the individual is
offered employment and submits the notice to the DLA to request
certification not later than 28 days after the individual begins work.
Under the pre-2012 WOTC program, patience was required on the part of
the taxpayer, since the government would often take several months,
and in some cases over a year, to issue the WOTC certification before
taxpayers could confirm the validity of their credits. Accordingly,
the VOW to Hire Heroes Act provided a streamlined certification
procedure, which is described below.

In February, the IRS extended the 28- day period to submit Form
8850. (Although the 28-day certification period is in the statute,
Sec. 51(d)(13)(D)(ii) gives the IRS authority to provide alternative
methods for certification.) Notice 2012-13 permits employers who hired
qualified veterans between Nov. 22, 2011, and May 22, 2012, to be
considered to have satisfied the certification requirement if they
submit a prescreening notice to the DLA by June 19, 2012.

In Notice 2012-13, the IRS also provided guidance on the methods for
electronic submission of Form 8850.

The maximum WOTC credits for qualified veterans are shown in Exhibit
1 and calculated as follows:

Exhibit 1:Maximum WOTC credit for qualified veterans

Member of a family receiving food stamps: $2,400

Unemployed at least four weeks: $2,400

Unemployed at
least six months: $5,600

With a service-connected
disability: $4,800

With a service-connected disability and
unemployed at least six months: $9,600

Returning heroes tax credit

An employer may be eligible for a returning heroes credit of:

Up to $2,400 ($6,000 maximum first-year wages × 40%) for
hiring a veteran who has been unemployed for at least four weeks.

Up to $5,600 ($14,000 maximum first-year wages × 40%) for hiring a
veteran who has been unemployed for at least six months.

Wounded warriors tax credit

An employer may be eligible for a wounded warriors credit of:

Up to $9,600 ($24,000 maximum first-year wages × 40%) for
hiring a veteran entitled to compensation for a service-connected
disability who has been unemployed for at least six months.

Up to $4,800 ($12,000 maximum first-year wages × 40%) for hiring a
veteran with a service-connected disability who has not been
unemployed at least six months.

Veterans receiving supplemental nutrition assistance program benefits

An employer also may still be eligible for a credit of up to $2,400
($6,000 × 40%) for hiring a veteran who is a member of a family
receiving assistance under a supplemental nutritional assistance
program, as described above. Employers claim these credits on Form
5884, Work Opportunity Credit.

Calculating the tax benefit to employers

Coupled with a deduction for salary paid, and depending on any
applicable limitation of the general business credit, of which the
WOTC is a part, the tax benefit from hiring a veteran can be
considerable. For example, under the returning heroes credit for a
veteran unemployed for at least four weeks, the net salary cost could
be as little as 57% of the gross salary for a veteran making $20,000 a
year and less than half the salary for a veteran unemployed at least
six months (see sample calculations in this
spreadsheet). For the wounded warrior credit, the tax benefit
relative to gross wages could be even greater—a net salary cost less
than one-third of gross wages for a disabled veteran unemployed for at
least six months.

Offset for not-for-profit entities’ payroll tax

The act also makes these credits partially available to tax-exempt
employers by making them partially creditable against Social Security
tax. The credit is modified as follows:

The credit percentage of qualifying first-year wages is 26%
(instead of 40%).

The credit percentage of qualifying wages is 16.25% (instead of
25%) for a qualified veteran who has completed at least 120, but
less than 400, hours of service for the employer.

The tax-exempt employer can account for the wages paid to a
qualified veteran only for services related specifically to the
furtherance of the “activities related to the purpose or function
constituting the basis of the organization’s exemption.” For
examples of the amount of offset against salary expense, see the
spreadsheet at the link above.

The IRS cautioned in Notice 2012-13 that, because filing Form 5884-C
is not coordinated with liability on Form 941, Employer’s
Quarterly Federal Tax Return, for FICA tax, an exempt
organization should not reduce its required employment tax deposit in
anticipation of the credit. If the organization does reduce its
deposit, it may receive a system-generated notice for the balance due,
including penalties and interest, which the IRS states will be abated
automatically when the credit is applied.

Streamlined certifications

The VOW to Hire Heroes Act enhances and streamlines the prior
laborious procedures for receiving certifications for employees under
the WOTC, by allowing the state workforce agency to certify that the
veteran met the required aggregate period of unemployment by receiving
unemployment compensation for that period. The IRS may also, at its
discretion, provide alternative methods for employers to receive
certification for qualified veterans because of their prior
unemployment status.

The law does not require that an employee be hired into a new or
preexisting position or that the employee be employed for a full year,
but note that the employee must work in the employer’s trade or
business at least 120 hours for the employer to claim a credit.

Veterans in the pre-2012 WOTC

Under previous law applicable through Dec. 31, 2011, an employer was
eligible for a federal tax credit for hiring individuals under
statutorily defined targeted groups that included certain veterans.
However, no retroactive WOTC credits can currently be claimed for
veterans hired before Nov. 21, 2011, if Form 8850 was not previously
submitted, since the 28-day deadline for doing so has expired.

State hiring credits

A number of states also offer state-level hiring credits and other
benefits to employers that hire veterans. Also, many states offer
property tax reductions to veterans, and some offer income tax reductions.

An appreciative homecoming

The large number of returning veterans will appreciate employers
that use this program to increase hiring of those who have served the
country. By the same token, employers can reduce their net payroll
costs and at the same time contribute to veterans’ reintegration into
the civilian workforce by employing them and accessing these valuable
WOTC benefits.

Use this downloadable
spreadsheet to follow sample calculations of the tax benefit for
employers outlined in this article.

EXECUTIVE SUMMARY

Although the work opportunity tax credit expired at
the end of 2011 for other targeted hiring groups, Congress extended
and expanded it for qualified military veterans hired after Nov. 21,
2011, and before Dec. 31, 2012.

The returning hero and wounded warrior credit amounts
are calculated at 40% of wages paid in the first year of hiring to a
qualified veteran, with the maximum amount of qualifying wages subject
to limits depending on the aggregate period of unemployment in the
one-year period ending on the hiring date.

A qualified veteran eligible for the wounded warrior
credit is one who is entitled to compensation for a
service-connected disability. The highest maximum credit amount,
$9,600, is available for hiring a wounded warrior who has been
unemployed for periods aggregating at least six months in the one-year
period ending on the hiring date. The maximum credit for hiring a
veteran with a service-connected disability without regard to periods
of unemployment is $4,800.

A returning hero creditof up to
$5,600 is available for hiring a veteran without a
service-connected disability who has been unemployed at least six
months in the one-year period before hiring. A credit of up to $2,400
can be claimed for hiring a veteran unemployed at least four weeks or
who is a member of a family receiving supplemental nutritional assistance.

Blake Christian (blakec@hcvt.com) is a tax partner
in the Long Beach, Calif., office of Holthouse Carlin & Van
Trigt LLP.

To comment on this article or to suggest an idea for another
article, contact Paul Bonner, senior editor, at pbonner@aicpa.org or 919-402-4434.

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